You know that an employee with wages is issued a Form W-2 for the compensation they are paid for services provided to your business. However, what if they are not on your payroll? How do you report payments to a vendor or freelancer?
The IRS has many rules in place to insure income is properly reported. Income that doesn’t result from a traditional W-2 job is captured by the IRS using numerous additional forms to increase the likelihood that individuals pay income taxes on their total earnings. One of these is Form 1099.
What is a 1099?
For many common types of income the 1099 form is used for reporting. There are several types of 1099’s to cover different types of income. Many people are familiar with the 1099-INT and 1099-DIV that report interest income or dividend income, respectively.
The next most common 1099 is the 1099-MISC. The IRS created this form for reporting “non-employee compensation”. What is a non-employee? Most commonly these are independent contractors and freelancers, however the 1099-MISC is used also used for other income sources, like paying rent or hiring an attorney.
How do you know when to issue a 1099-MISC?
If you hired and paid over $600 to a vendor or contractor in the normal course of your business and they are not your employee or an incorporated business (some exceptions apply) than you have to issue a 1099-MISC. So, for example, if you hired a freelancer to design your company logo, and paid them $650 than you have to file a 1099-MISC.
How do you file a 1099-MISC?
When you know that you will need to issue a 1099-MISC it is a good idea to have the person you are paying fill out Form W-9 before you pay for the work.
In most cases you do not need to withhold any taxes, and if you keep track of these payments and your records are up to date, it should be easy to filing the required paperwork at the deadline.
1099s are due by the end of January each year, and must be sent to the IRS by March 2. You can file these electronically or you can order paper copies from the IRS. Make sure you send a copy to the IRS, to the person you paid, and keep one for your records. There are penalties for not sending a 1099 and/or not filing it with the IRS, make sure you keep documentation of when you mailed the forms to support your filings.
Final thoughts
For all the diverse ways people can make a living, it’s (almost) all income to IRS. So, if you paid someone and the payment requires you to prepare a 1099-MISC, make sure you understand how to handle it. If you have additional questions, or want to discuss your specific facts, contact us, we are happy to assist you.